The Lean LaunchPadLecture 6: Revenue Streams Steve Blank Jon Feiber John Burke Ann Miura-Ko Jerry Engel Jim Hornthal Oren Jacob
key activities value customer proposition relationships key customerpartners segments cost revenuestructure key streams resources channels 1 images by JAM
REVENUE STREAMS what are customers really willing to pay for? how?are you generating transactional or recurring revenues?
REVENUE MODEL =the strategy the company uses to generatecash from each customer segment
How Many Will You Sell?• What was the Market size and estimate of market share?, – Translate into the anticipated number of customers (as in 10% of a million- person market=100,000 customers)• How many can your channel sell?• How much will the channel cost?• How many customer activations? – Revenue? Churn/Attrition rate? customers/?• How much will it cost to acquire a customer? – How many units will they buy from each of these efforts?
Where is the money coming from? Revenue Model Choices Channel Web Physical Direct Sales Products Direct Sales Subscription Bits Products Add-on services Subscription Upsell/Next Sell Upsell/Next Sell ReferralsProduct Ancillary Sales: Direct Sales •Referral revenue Products •Affiliate revenue •E-mail list rentals Service Physical •Back-end offers Upsell/Next Sell Referrals Leasing
Web/Mobile Revenue Models
“Direct” revenue models• Sales: Product, app, or service sales• Subscriptions: SAAS, games, monthly subscription• Freemium: use the product for free: upsell/conversion• Pay-per-use: revenue on a “per use” basis• Virtual goods: selling virtual goods• Advertising sales: unique and/or large audience
“Ancillary” revenue models• Referral revenue: pay for referring traffic/customers to other web or mobile sites or products.• Affiliate revenue: finder’s fees/commissions from other sites for directing customers to make purchases at the affiliated site• E-mail list rentals: rent your customer email lists to advertiser partners• Back-end offers: add-on sales items from other companies as part of their registration or purchase confirmation processes, or “sell” their existing traffic to a company that strives to monetize it and share the resulting revenu3
Physical Revenue Models
Asset Sale• Sale of ownership right to a physical product
Usage Fee• Usage of service. Fee is proportional to the usage of the service.
Subscription Fee• Fee for continuous access to a service
Renting• Fee for temporary access to a good or service
Licensing• Fee for use of some IP (including software)
Intermediation Fee• Often found in marketplaces of various types, a fee for bringing together two or more parties involved in a transaction
Advertising• Fee paid by brands and companies to get in front of potential customers
PRICING MODEL =the tactics you use to set the price in eachcustomer segment
How do we price the product? Pricing Model Choices
How do we price the product? Pricing Models - Physical• Product-based pricing• Competitive pricing• Volume pricing• Value pricing• Portfolio pricing• The “razor/razor blade” model• Subscription• Time/Hourly Billing• Leasing 19
How do we price the product? Pricing Models – Web/Mobile/Cloud• Product-based pricing• Subscriptions• Freemium• Pay-per-use• Virtual goods• Advertising sales 20
Payment Flows• Draw the diagram• Put in Numbers
Other words we use in the place of price• Fee• Commission• Subscription• Toll• Interest• Rent• Tax• Shipping
Common approaches to pricing Cost + markupCost based Typically not a strategic way to price Driven by internal economics and not customer insight Based on buyer’s perception ofValue based value (e.g. time saved, new efficiency created, etc.) Customers don’t necessarily feel that they want to pay this way
Pricing Choices (1)• Cost-based pricing: based on a multiple of actual product cost. Typically priced for maximum revenue/profit versus volume• Value pricing:based on the value delivered by the product rather than the cost itself• Competitive pricing:positions the product vs. others in its competitive set, typically in existing markets• Volume pricing:designed to encourage multiple purchases or users
Pricing Choices (2)• Portfolio pricing. Mix of high markups and some with low, depending on competition, lock-in, value delivered, and loyal customers• “Razor/razor blade” model:part of the product is free or inexpensive; yet it pulls through repeat, highly profitable purchases on an ongoing basis• Subscription: while now thought of a software strategy, the “Book of the Month Club” pioneered this for physical products• Leasing: lowers the entry cost for customers. Provides constant earnings over a period of years
Additional components of pricing• Exclusive vs. non-exclusive• What do you price? What do you give away for free?• How does cost vary at different production levels?
Competition as an influence • Pure competition Nature of • Oligopoloy Market • Monopoloy What is their product?How they will react? What are their costs and prices? “What pricing will make them feel the worst?”
Multi-side Markets and Revenue• Single-sided markets that care about revenues• Web-based Multi-sided markets may care about users first, revenues second
“Revenue First” Companies• Time to doublings for monthly revenues• Key questions: • When will I get to $100k/month in revenues? • When will I get to $1M/month in revenues? • What assumptions about my business am I making when I reach these milestones?
“Users First” CompaniesIf you say your business is advertising based:• How do you get to 10M monthly users?• How do you become one of the top 5 websites visited?
New Market Revenue Forecast New Market Sales Curve
Existing Market Revenue Forecast Existing Market
Resegmented Market Revenue Forecast
Other Revenue Issues• Channel issues – Return rights? – Channel discounts? SPIFs?• Market Type affects Revenue Streams• Demand curve affects Revenue• Consider Lifetime Value
Other Questions• What are my customers paying for?• What capacity do my customers have to pay?• How will you package your product ?• How will you price the offerings?• What constitutes cost for the company?• What are the key financials metrics for your business model?• What are the risks involved?
Start with Key Assumptions• Target market Sales – USA market – 1.5 M patients Start in EU middle of year 3 – Europe – 2 M patients Start in USA end of year 4• Package Personnel – Reusable wrist watch Average salary $120 K – Disposable sensors / patch Load factor 1.5 – Access to patients data Headcount from 4 to 174 in• Product development year 8 – 4 people in the beginning Financing – $2 million Series A – $3 M – 1.5 years to develop (for BP) Series B – $10 MPrice per package: $150COGS Operating Expenses Profit $60 per unit $90 per unit 37
Does it add up?• Is the revenue adequate to cover costs in the short term;• Are you confident the revenue will grow materially if not dramatically over time; and• Does the profitability get better as the revenues get bigger? 38
Team Deliverable for Next Week• What’s your revenue model?• How will you price your products?• Draw the diagram of payment flows• What are your key financial metrics?• Test pricing 100 web customers 10/15 non web?• How do competitors price?• Assemble a rough income statement• Summarized in a 5 Minute PowerPoint Presentation